What tech stocks tell us about startups

06/24/2016By Sammy Abdullah, CFA

At DAN Fund we monitor a number of publicly traded tech companies, specifically those internet companies similar to what we invest in. While comparing public companies to stratups isn’t perfect, it’s the most honest comparison we can make (M&A multiples are notoriously inaccurate and biased). Below are the major tech stocks we follows as well as observations that apply to any stage tech company, startups included.

TTM

TTM

TTM

Capital

Enterprise

Market

REV PER

Q1 2016

Q1 2016

Name

Ticker

Revenue

EBITDA

FCF

Surplus

Value

Cap

Debt

Cash

EV Calc

$ of D+E

EBITDA/REV

Rev Multiple

Social

Facebook

FB

$19,770

$9,440

$9,880

$34,886

$306,540

$325,170

$0

$20,620

$304,550

$0.57

48%

15.40x

Linkedin

LNKD

$3,210

$266

$894

$4,589

$23,460

$25,410

$1,140

$3,160

$23,390

$0.56

8%

7.29x

Twitter

TWTR

$2,380

-$67

$454

$6,507

$9,390

$11,240

$2

$3,580

$7,662

$0.37

-3%

3.22x

Median

$3,210

$266

$894

$6,507

$23,460

$25,410

$2

$3,580

$23,390

$0.56

8%

7.29x

Marketplaces

Just-Eat

JSTLF

$351

$83

$105

--

$4,187

$4,460

$0

$273

$4,187

---

24%

11.94x

Zillow

Z

$703

-$10

$40

$2,985

$5,910

$6,120

$230

$514

$5,836

$0.22

-1%

8.30x

Priceline

PCLN

$9,530

$3,650

$3,240

$5,274

$69,710

$67,510

$6,420

$3,380

$70,550

$0.81

38%

7.40x

TripAdvisor

TRIP

$1,480

$233

$403

$758

$8,820

$9,430

$111

$692

$8,849

$1.70

16%

5.98x

GrubHub

GRUB

$386

$89

$33

$768

$2,200

$2,530

$0

$324

$2,206

$0.50

23%

5.72x

Sabre

SABR

$3,110

$706

$552

$2,038

$10,570

$7,370

$3,310

$112

$10,568

$0.58

23%

3.40x

eBay

EBAY

$8,670

$2,980

$3,520

$14,627

$29,400

$27,960

$9,004

$8,000

$28,964

$0.37

34%

3.34x

Shutterstock

SSTK

$444

$60

$87

$222

$1,300

$1,610

$0

$276

$1,335

$2.00

13%

3.00x

Etsy

ETSY

$297

$22

$22

$411

$825

$1,080

$13

$270

$823

$0.70

7%

2.77x

Lending Club

LC

$501

$25

$78

$1,151

$1,310

$1,840

$15

$584

$1,271

$0.43

5%

2.54x

Expedia

EXPE

$7,200

$800

$1,420

$8,788

$17,150

$16,070

$3,240

$2,090

$17,220

$0.60

11%

2.39x

Care.com

CRCM

$146

-$3

$5

$283

$228

$279

$0

$52

$227

$0.52

-2%

1.55x

IAC

IAC

$3,280

$383

$377

$11,841

$4,740

$4,460

$1,730

$1,430

$4,760

$0.24

12%

1.45x

Angie's List

ANGI

$344

$16

$15

$278

$443

$439

$58

$59

$437

$1.03

5%

1.27x

Median

$602

$86

$96

$1,151

$4,464

$4,460

$84

$419

$4,474

$0.58

13%

3.17x

Information

Yelp

YELP

$590

-$9

$56

$793

$1,810

$2,170

$0

$375

$1,795

$0.74

-1%

3.04x

TrueCar

TRUE

$263

-$38

-$9

$515

$543

$619

$27

$106

$540

$0.49

-14%

2.05x

Median

$426

-$23

$23

$654

$1,177

$1,394

$14

$241

$1,167

$0.61

-8%

2.55x

Content Delivery

Yahoo!

YHOO

$4,830

$2,890

$943

$8,888

$30,770

$35,490

$1,250

$5,980

$30,760

$0.48

60%

6.37x

Netflix

NFLX

$7,160

$320

-$851

$0

$39,270

$38,550

$2,370

$2,070

$38,850

3.02

4%

5.43x

Google

GOOGL

$78,000

$25,510

$26,960

$33,694

$420,610

$487,780

$7,280

$73,450

$421,610

1.90

33%

5.41x

WebMD

WBMD

$652

$153

$109

$9,259

$2,330

$2,210

$691

$593

$2,308

$0.07

24%

3.54x

Pandora

P

$1,230

-$112

-$82

$1,153

$2,580

$2,690

$239

$349

$2,580

$0.88

-9%

2.10x

Median

$4,830

$320

$109

$8,888

$30,770

$35,490

$1,250

$2,070

$30,760

$0.88

24%

5.41x

Gaming

Activision Blizzard

ATVI

$4,840

$1,590

$1,290

$10,343

$31,510

$28,290

$5,840

$2,870

$31,260

$0.30

33%

6.46x

Electronic Arts

EA

$4,400

$1,080

$1,220

$1,349

$20,090

$22,540

$1,150

$3,830

$19,860

$1.76

25%

4.51x

Zynga

ZNGA

$768

-$26

-$1

$0

$1,400

$2,220

$0

$857

$1,363

---

-3%

1.77x

Take-Two Interactive

TTWO

$1,410

$89

$261

$1,089

$2,220

$3,150

$498

$1,270

$2,378

$0.89

6%

1.69x

Median

$2,905

$585

$741

$1,219

$11,155

$12,845

$824

$2,070

$11,119

$0.89

15%

3.14x

-The startups that command the strongest revenue multiples on median are those that have a Social aspect (7.29x), followed by Content Delivery (5.41x), and Marketplaces (3.17x). To the extent it makes sense to build your startups around any of these themes, doing so will help justify a premium multiple when raising capital.

-Startups in the Valley that have an affinity for making a bonfire with their cash aren’t going to like hearing this: in every category, internet businesses with the highest margins command the highest multiples (besides Zillow and Netflix, which are growing exceptionally fast). Facebook enjoys a 48% EBITDA/Revenue margin, the top 7 Marketplaces have a margin of 22% while the bottom 7 have a margin of 7%, the top 3 Content Delivery companies have a margin of 32% while the remainder average 7%, and the top 2 Gaming business average 29% while the bottom 2 average 1%. Businesses should remain cognizant of the effect that margins have on multiples and carefully weigh the risk-reward of increasing expenses for the sake of growth. Outside the Valley, cash efficiency matters.

-On median, every category generates cash. All of these companies are built on business models that are economical: they’re not overpaying to acquire and service the customer. Median annual cash flow from operations is $894mm in Social, $96mm in Marketplaces, $23mm in Information, $109mm in Content Delivery, and $741mm in Gaming.